How To Start Investing When You’re a Complete Beginner

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how to start investing

Are you trying to figure out how to start investing in the stock market but don’t know where to start? Well lucky you, you’ve come to the right place! Many people who are new to investing aren’t sure where to begin.

When people hear terms like the stock exchange, index, stocks, bonds, mutual funds etc. their eyes begin to glaze over. Don’t worry, I was the same way!

It’s because of those feelings that I created this blog. I want each and every one of you to have access to the resources you need when it comes to your money.

The feeling of being helpless and unsure of where to start is what many people face when it comes to investing. Believe me, I know it can be overwhelming when you’re first starting, you’re not alone!

I talk with friends, family members and readers all the time who are stumped and unsure of how they should start investing.

If you are one of those who feels overwhelmed, this guide is just what you need! I believe that pretty much anyone can begin investing if they learn a couple basics I’ll outline below.

Guidelines For Investing

Let’s start with a couple of general guidelines you need to know when it comes to investing.

First, you aren’t going to become wealthy if your money is sitting around in a regular ole low interest bank account.

Second, you aren’t going to become wealthy just by earning more money.

As the saying goes the more you earn the more you spend! If you want a chance at becoming financially free and maybe even wealthy you need to learn how to grow your money through investing.

Once you start investing and your money is beginning to earn you more money you are then able to see profitable returns. Investing isn’t something you make money on overnight small investments equal big returns over time.

The returns you’ll see from investing will most likely come in the form of one of these.

  • Interest and dividends from a savings account or dividend paying stocks and bonds. –Dividends are basically payments you receive from certain investments (In case you were wondering) ;).
  • Appreciation of value from an investment portfolio, real estate, or other asset.

Whether you’re hoping to save for retirement, become financially independent or save for your child’s future you’ll reach your goals much faster through investing.

how to start investing

Myths Associated With Investing

I’d like to clear the air and sort out the myths I hear way too often when it comes to beginning investors.

“I don’t have enough money to invest -I need thousands of dollars to start investing.”

False: You can start investing with as little as $5. More on this in a bit, I’ll tell you exactly how!

“I can’t invest, I need an investment advisor”

Wrong again. Nowadays there are so many ways to invest that don’t involve a financial or investment advisor. It’s really easy to place a trade yourself with a couple basic skills.

I can’t invest, it’s too risky!

It doesn’t have to be. There are many ways to invest that aren’t risky. People often hear of people losing all of their money in the stock market and decide that investing isn’t for them. Believe me there are safe ways to invest your money.

Before we dive into the nitty gritty here I want you to know that the earlier you start with your investing journey the better off you’ll be. The compounding effect of your money can make you a lot of money if you stay in the the game for the long haul.

What Is Investing?

Investing is when you purchase something with the the expectation of future profit. It’s how you make your money grow, or appreciate for long term financial goals.

Why Should I Invest?

Investing when you’re young is one of the best ways to see profitable returns on your money. We can’t be sure that Social Security is going to provide for a comfortable retirement, so having investments of your own is essential to your long term savings plan.

Investing allows you to grow your money through compounding. Compounding is the ability for your money to earn more money. It basically makes money from your previous earnings.

Of course, you’ll experience ups and downs in the market, but investing young means you have decades to ride the waves. 

Keeping your money in a bank is ok for some things but if you want to build wealth you’re going to need to do more than stash it away in a bank. The problem with a standard bank is that they don’t offer interest rates that are good for long term growth.

When Should I Start Investing?

The answer to this question is really simple. NOW. Most people wait too long to begin investing. Doing anything the first time can be a bit scary but honestly most people should have started investing years before they actually do.

There’s a small chance for loss when you invest, but there’s an even bigger chance of gaining a whole lot of money!

In general, you want to start investing when you’re able. What I mean by this is once you’ve paid off all high interest debt, you’ve created an emergency fund, and you’ve done a bit of basic education on what investing is all about — Yippee, you’re doing this now!

By having your high interest debts paid off and an emergency fund in place you are well on your way to becoming a savvy investor.

The rules of the game when it comes to investing is to leave your money in the market for the long haul. Yes, there will be some ups and downs in the market but riding the waves is your key for growth.

how to start investing

Benefits Of Investing At A Young Age

When you start investing at a young age you have the power of compounding interest. As mentioned above, compounding is when your money makes more money.  

Honestly, compound interest is one of your best friends when it comes to investing. You don’t have to have thousands of dollars to start investing when you have the power of compound interest.

The best thing you can give compounding interest is plenty of time to grow. The longer your money is invested the more time it has to grow. An investment that is left untouched for several years can add up to a large amount of money even if you don’t add another dollar.

Take a look at the scenario and chart below, courtesy of Windgatewealth, this is an excellent example of the power of compound interest.

Alice, Barney and Christopher experience the exact same 7% annual investment return on their retirement funds.

The only difference is when and how often they save:

  • Alice invests $5,000 per year beginning at age 18. At age 28, she stops. She has invested $50,000 total over 10 years.
  • Barney invests the same $5,000 but begins where Alice left off. He begins investing at age 28 and continues the annual $5,000 investment until he retires at age 58. Barney has invested for 30 years and $150,000 total.
  • Christopher is our most diligent saver. He invests $5,000 per year beginning at age 18 and continues investing until retirement at age 58. He has invested for 40 years and a total of $200,000.

Barney has invested 3 times as much as Alice, yet Alice’s account has a higher value. She saved for just 10 years while Barney saved for 30 years.

This is compound interest: the investment return that Alice earned in her 10 early years of saving is snowballing. The effect is so drastic that Barney can’t catch up, even if he saves for an additional 20 years.

Pay Off High Interest Debt.. Then Start Investing

First of all, paying off debt means you will have reduced stress, lower risks and the ability to withstand some financial ups and downs. Basically, once you’re out of debt you will have more control of your finances.

Another reason I suggest paying off high interest debt is because most credit cards charge high interest rates… as much as 18% or more.

Virtually no investment will give you returns to match an 18% interest rate. That’s why you’re better off eliminating all credit card debt before investing.

Once you’ve paid off your credit cards, you can budget your money and begin to save and invest.

Basic Investing Terminology You Should Know

Stocks

A stock is a share of ownership of a company. If you own a company’s stock, you actually own a percentage of the company itself. As you acquire more stock, your ownership stake in the company becomes greater.

Bonds

Bonds are a debt security that raise capital for new companies, local projects and even the US government. By purchasing a bond, you are loaning money to one of these entities.

Mutual Fund

Is a type of professionally managed investment that pools your money with other investors. The fund manager then uses the pooled money to buy securities for the group.

Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds, ETF’s. Everything in your account would be your portfolio

Diversification

I like to explain diversification as owning a variety of different investments. Have you heard the saying don’t put all your eggs in one basket? Well, this is the same when it comes to investing.

You want to own a variety investments so that your long term success isn’t dependent on only one thing.

What Is An Asset Allocation?

Asset allocation is an investment strategy that aims to balance risk and reward by splitting your investments according to your goals, risk tolerance and investment timeframe. The three most common asset classes are stocks, bonds, and cash.

What Are ETFs?

ETF’s are short for exchange traded funds. They combine the simplicity and low costs of index mutual funds with the flexibility of individual stocks. Basically ETF’s allow you to buy small pieces of several investments in one simple fund.

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    What Should I Start Investing In?

    401(k)

    Many people don’t realize that the best place to start investing is usually right in front of them. The 401(k) plan offered through their employer.

    3 reasons why a 401(k) is great for beginning investors

    • You don’t have to have money to get started-investments can come out of your paycheck
    • You can set up automatic transfers from each paycheck
    • Many employers offer contribution matches -this is free money

    Why is a 401(k) the best place to start? 401(k)’s are great because you aren’t taxed on any dividends until you begin withdrawing the money which ideally wouldn’t happen until retirement.

    The benefit to being taxed at withdrawal is that most people are in a lower tax bracket at this point in their life, which is good for you because this means more money in your pocket

    If you’ve already been investing in your 401(k) but think you should be doing better. Sign up for Blooom! Blooom is a great resource that will analyze your account to make sure your investments are working for you.

    Blooom checks your plan to make sure you’re not overpaying fees and that you’re in the best possible investments available to you.

    Blooom is free for your first analysis then $10 per month after that! Why not give it a shot for a one time basis. If you like your experience you can always choose to use Blooom on a more regular basis

    IRA

    If you don’t have access to an employer sponsored retirement account such as a 401(k) or you’ve maxed out your contribution, the next thing you can invest in is an IRA.

    Without going into significant details of both, the Roth IRA is a better fit for most investors because of tax advantages.

    There are 2 kinds of IRAs:

    • A Traditional IRA
    • ROTH IRA.

    Traditional IRA- Traditional IRA’s are funded with pre-taxed dollars which can lower your taxable income for the year.

    ROTH IRA-Your contributions are after-tax meaning you already paid your income tax so when you reach retirement withdrawals are tax-free.

    Rollover IRA

    Rollover IRA’s are accounts that you can use if you plan on leaving your employer after investing in their 401k plan.  You simply “roll it over” into a rollover IRA

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      How Much Should I Invest?

      After you’ve decided where to invest your money the next step is deciding exactly how much to invest. First off, do you have a budget? If you haven’t created a budget do yourself a favor a make a quick list of your monthly expenses. Begin investing only after after you’ve paid your monthly bills and saved at least three months in your oh sh!it fund aka emergency fund.

      A good goal for investing is 10% to 15% of your income per year. Obviously, if that’s not realistic something is better than nothing, start where YOU can.

      Where Can I Start Investing?

      Brokerage Accounts

      Brokerage accounts are a good option for investing once you’ve taken advantage of your employer sponsored account, maxed out your IRA and still have money left over.

      The best brokerages for beginners have account minimums ranging from $0 to $2,500. Many of these companies even offer Roth IRAs with no minimum balance. 

      Finding a brokerage account to start investing is not as difficult as it might seem. You may have to do a bit of research but I guarantee you that you can find a place to take care of you and your investing needs.

      Vanguard would be my first choice for IRAs or 401(k)s. While Vanguard has the most options as well as competitive rates, its minimums can be rather high if you are just starting out. 

      I would then look at Ameritrade and Ally Invest. The main reason is because their account fees are some of the lowest you’ll find. Plus, the level of service is high quality.

      Last but not least I would look into Betterment and Swell robo-advisor options

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      Discount Brokerages

      Remember how I mentioned you don’t need a lot of money to start investing? Many of the discount brokerages below will let you invest with little money

      • Acorns-no minimum deposit required
      • Ally Invest- no minimum
      • Stash Invest $5 min balance required
      • Etrade $500 min balance required

      It’s good to note that these are a bit more hands off. Which means there is a bit more “do it yourself” with these brokers. However, the customer service and educational resources are fabulous.

      Robo-Advisors

      If you’d like a bit of help when it comes to managing your investments don’t you worry there are options for you.  Even if you are investing with just little bit of money.

      I’ve referenced robo-advisors in a couple different articles for good reason. Robo advisors are a fantastic way to invest if you are overwhelmed with the thought of brokerage accounts.

      For those of who want to invest but don’t have the confidence or time you should check out robo-advisors. Robo advisors provide professional guidance at an extremely low cost. If you want to learn more about different investing platforms and robo-advisors this is a great article.

      If you’d like to jump into investing right now with a robo advisor these are 2 of my favorites.

      Swell has a 0.75% annual fee and a $50 minimum account value. This makes for a great starter investment account if you don’t have a lot of money to throw at it.

      Betterment is a clear leader in the robo-advisor race with over 300,000 clients and $11 billion in assets under management. It also has low minimum account balances and has one of the lowest annual fees. Truly a great option.

      By starting now, you’re able to start growing your money quicker! Don’t be guilty of holding back you will only hurt yourself in the long run.

      Find what investment strategy will work for you and stick to it. The best way I’ve found to monitor our investments is through the free tools at Personal Capital. Personal Capital is great, we’ve been using them for years.

      One of my favorite things about Personal Capital is the free portfolio review. They analyze how your investments are performing and see if there are lower fee alternatives.I’ve been using them for years and ht

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